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Tuesday, June 13, 2006

Gold, oil extend drop, dollar up on rate talk

Gold, metals and oil extended losses on June 14 as investors dumped higher-risk assets, Japanese stocks regained lost ground and the US dollar set a seven-week high on persistent talk of higher US interest rates.

Japan's Nikkei stock average (N225) dropped almost 1% at the start but clawed back the losses and registered a 1.05% gain, thanks to advances by retailers such as Aeon Co which are dependent on the domestic economy.

The insipid recovery in Tokyo was reflected in other Asian stock markets with South Korea's benchmark KOSPI rising 0.9% and Taiwan's key index adding 0.85%.

Tokyo shares had their biggest one-day percentage fall in two years on June 13. The losses in Asia spilled over into Wall Street where the Dow Jones industrial average dropped 0.8% to 10,706.14 yesterday. After more than a month of steady declines, it has now lost all of its gains for the year.

Investors have dumped riskier assets and moved their money to dollars since May on worries that the US Federal Reserve would be forced to raise rates for the 17th straight time at a meeting on June 28-29 to stymie inflation despite signs that the world's biggest economy and Asia's biggest export market was slowing.

The rate expectations helped push the dollar to a seven-week high against the euro and yen in New York and kept them near those levels in early Asian trading on June 14.

Spot gold plunged to US$561 (RM2,070) an ounce to notch up a 22% drop in the past month. June 13's drop in gold prices was its sharpest decline in 15 years.

"The market continues to see movements linked to risk aversion," said Kota Kimura, forex manager at Shinkin Central Bank. "Unless some fresh and strong incentives come out, money is likely to keep flowing back to dollar assets."

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